Mergers and Acquisitions

It seems that the board of Dena Bank has cleared the merger proposal with Bank of Baroda and Vijaya Bank that was announced by the government a few days back.

What a relief! To have the board of a government owned bank act in conformity with the announcement of the government. Strange things do happen. We now wait with bated breath for the boards of Bank of Baroda and Vijaya Bank to do the same.

It seems the time for initiatives of great magnitude, that have absolutely no impact on the common man, and can be both forcefully justified as well as denounced with irrelevant arguments, depending on which side of the fence you are on, to be announced, is upon us once again. In this case it is the planned merger of Bank of Baroda, Dena Bank and Vijaya Bank, three government owned banks.

Why is it being done? There are good reasons, it seems.

“Simply”, as they say in some parts of the country, where the p sounds more like a b, seems to be one important reason.

“JLT”, acronym for “just like that”, like they say in some other parts, where the j sounds just like a j, is another.

And, “the cause is in my will”, the lines Shakespeare got Julius Caesar to mouth in the eponymous play, yet another. Who could have guessed?

The Finance Minister has categorically said that no jobs will be lost. Whether they are needed in the rationalised, merged entity or not. That in itself can justify a transaction of this magnitude and nature, without the need for bringing additional supporting arguments to the table. After all, the cost of running the merged entity will continue to be similar to the sum of the three entities, as cost of human resources is a major cost for banks. What better reason can there be to merge?

This merger is also expected to lead to the recognition and resolution of stressed assets, already under way, which will help improve asset quality over the next six to twelve months. As we all know, stressed assets cannot be recognised and resolved if three nationalised banks stay independent.

In addition, cost of funds for the merged entity is expected to come down since Vijaya Bank has a high dependence on short-term bulk deposits, which are typically high cost in nature. And, since Vijaya Bank’s cost of funds will go down by leveraging cheaper funds of the other two banks, it follows that the cost of funds of the other two banks will not go up as they will have to shoulder a proportionate burden of Vijaya Bank’s higher cost of funds. Elementary. Moreover, this arithmetic of weighted averages would not have worked if the three were separate entities.

Even analysts are agog. According to them, the success of this exercise is crucial for future such attempts. Not for this transaction, but for future transactions. As success of the merger is not crucial, it is important that it was done.

In particular, the proposed merger is seen as a test of the capacity of a large bank, which itself is facing pressure on asset quality, to absorb a weaker peer. Even though mandated by the government.

It apparently matters. Because when a state lender faces pressure on its Balance Sheet, the government does a complex transaction known as money transfer, which is christened as “recapitalisation” in case the receiving entity is a stressed government bank. It takes from one of its pockets, which mostly has your and my tax money, and puts it into another, the one called “Balance Sheet of Nationalised Banks” which has become depleted either because farm loans had to be waived off or because a well-connected businessperson had to be given unsecured loans as he had the ear of the minister or capacity for favours to government bankers with compensations that have no relation to the huge amounts of money handled by them.

Ultimately, how well the three banks combine could well end up determining the future of consolidation among public sector banks. Alternatively, and more probably, the future of consolidation among public sector banks could also be determined by when the next period comes around when someone in power needs to show actions that do not impact anyone an iota but can be forcefully justified as well as denounced with irrelevant arguments, depending on which side of the fence you are on.

Of course, it is important for the government to continue to run businesses instead of merely governing and making and enforcing laws. This is why these banks could not be offered to private investors and bankers. Unfortunately, private investors might have sought unreasonable conditions like value.